Boston Scientific Net Almost Triples

Boston Scientific ( BSX) announced profits that were nearly three times higher than last year and shares rose 5% after the company answered questions about its line of heart-saving stents, which were recalled after causing a number of deaths and serious injuries.

Boston Scientific, which delayed the release of second-quarter results by a week after it widened a recall of its best-selling Taxus stent, announced net income of $313 million, or 36 cents a share, up from the $114 million, or 13 cents a share, it had a year ago. In premarket action, shares of the medical-device maker rose $1.69, or 5%, to $35.28.

But second-quarter results included a charge of $57 million, or 6 cents a share, for the recall and another penny a share in dilution from an acquisition. All told, the recall cut the company's gross margins by $78 million, with a sales reversal of $35 million and a $43 million inventory write-off.

Excluding all items and charges, Boston Scientific said earnings came in at $377 million, or 44 cents a share, which is much better than the year-ago $126 million, or 15 cents a share, but short of the falling Wall Street consensus estimate of 45 cents a share.

Net sales came in at $1.46 billion, up 71% from the $854 million it had a year ago and essentially in line with Wall Street expectations. Excluding currency effects, the company said sales came in at $1.43 million. Still, revenue growth was driven by overall strength in the company's cardiovascular unit, which includes stent sales. Sales from the cardiovascular unit came in at $1.19 billion, up 93% year over year, with Boston Scientific's other lines of business posting double-digit percentage revenue growth from the year-ago quarter.

"We experienced impressive growth across all our businesses and regions, and we are reporting new records in both sales and earnings," said Jim Tobin, president and CEO. "We were especially pleased with the strong conversion rate to drug-eluting stents in the United States, which reached more than 80% by the end of the quarter. This resulted in a significant leveraging of our profitability, and we will be working hard to ensure it continues in the coming quarters."

Despite the recall, the company said that overall worldwide coronary stent sales came in at $652 million, with Taxus sales accounting for $597 million and Express2 stents accounting for $41.6 million.

Boston Scientific said the recall was complete in the U.S. and had gone "better than could be reasonably expected" with the company shipping 40,000 Taxus stents in 48 hours, completely restocking supplies at more than 1,200 accounts. The company said demand for Taxus remained strong, averaging over $6 million a day last week back to 87% of its usual level last Friday, but the recall hurt the company's market share in the drug-soaked stent, at least temporarily.

"Clearly, there was turmoil and turbulence in the market caused by the recall, but through the last five days, 964 accounts have placed run rate orders for Taxus," the company management said in a conference call discussing quarterly results. "In midst of the recall, at the lowest we held approximately 55% market share. ... Normally, we're not satisfied with this level of business, but clearly it could be much worse."

Going forward, the company said that its international recall of the stent would likely take a few more weeks, but said it had proceeded well. The company declined to give earnings guidance, but said that gross margins would remain near 79% for the back half of 2004 and added that it would be announcing plans to hold a conference call discussing earnings guidance the week before Labor Day.

While more doctors are switching from the company's bare-metal stents to the drug-coated variety, Boston Scientific is trying to regain credibility in the wake of the recall. In reaction to the recall, a number of brokerages downgraded the company's shares last week, fearing that physicians could switch to rivals like Johnson & Johnson ( JNJ), which makes the Cypher stent, or Guidant ( GDT) and Medtronic ( MDT), both of which have stents in clinical trials.

On July 2, when dangerous manufacturing defects in Taxus-brand drug-soaked stents and Express2 bare-metal stents first surfaced, the company only recalled 200 units and appeared to believe the problem was an isolated one. Some improperly welded stents, which are used to keep arteries clog-free after a balloon angioplasty, blocked the balloon's ability to deflate.

But with three people dead and dozens more injured as the result of the defect, the company widened its recall just over a week ago, forcing it to delay the release of earnings and take a charge.